Heavyweight Champ

American analysts further point out that foreign direct investment at least does not wash in and out with the economic tides; once turned into bricks, mortar and machinery, it stays put. Portfolio--that is, stock and bond--investment is more volatile. But Lawrence Kudlow, chief economist of , points out that the 37% nose dive in the NASDAQ index from its March 10 high to its May 23 low did not appear to scare away much foreign investment--at least not enough to make any difference in the dollar's price. "I was holding my breath on that one," says Kudlow.

A small and orderly decline in the dollar would not be at all unwelcome to most economic analysts. It would help U.S. exports, by making them cheaper in terms of foreign currencies, and bring U.S. trade accounts closer to balance. A sudden and sharp drop in the buck's value, however, would be a very different matter--in fact, a disaster. It would greatly worsen U.S. inflation by driving up the price of imports. Foreign goods and services directly account for about 15% of all American gross-domestic purchases and have a real influence far beyond that because so many American products either compete with imports or are assembled partly from imported components.

Though the odds are against it, a dollar implosion cannot be ruled out. Allen Sinai, president and chief global economist for Primark Decision Economics, a global forecasting firm, assigns it about a 30% chance. One reason is that money traders, once moved in any direction, have rarely been noted for moderation; they often push the price of any currency up or down far beyond what might be justified by economic fundamentals.

Fundamentals too could turn against the dollar. The doomsday fear is that the Fed, in its zeal to head off inflation, will hit the monetary brakes too hard, causing a severe slowdown in the U.S. economy. That frightens away some foreign investment, causing the dollar to drop sharply. Then inflation rises despite the slowdown, prompting the Fed to crack down harder still, and so on around a truly vicious circle.

The innate strength of the U.S. economy and the vigor of American productivity ought to prevent that circle from starting, and keep the dollar at least relatively strong for a long time to come. But as the dollar pessimists of 1998 have discovered, exchange markets are so volatile that any prediction at all about what they may do should be made with crossed fingers and accompanied by repeated knocks on wood.